11 Responses to “Swimming Naked in Omaha”

I’ve been saying this deflation story was nonsense for months, arguing the entire time that longer term bonds (5yrs plus?) will never ever get their purchasing power back.

Even if you accept the deflation story (which I don’t) — you have to also believe that the Fed will not be able to print money like crazy from now until this perceived deflation is eliminated… Investors should consider how many nanoseconds it would take a computer at the Federal Reserve to create trillions of dollars. The only “limit” is the size of floating point numbers the Fed’s computers can handle.

Either the guys with the printing press don’t know how to turn it on (which seems to be Wall Street’s rather implausible view) … or else the Fed can easily print more money than any of us can count.

Wall Street’s view is in my opinion nothing short of absurd. Central bankers in every banana republic in the world have demonstrated that money can be printed in limitless amounts. The only difference now is that the money is created electronically, not printed.

Short term, I don’t believe the deflation argument. But for longer term bonds? Only an insane person would believe the world’s largest debtor won’t figure out how to crank up the printing press (Japan is a net creditor — so it is not a valid counter example).

I beg to differ; Japan is a valid example. If the economic peril is to continue, Japan’s trade surplus continues to fall, thus reducing the ability for its workers to save and buy (Japanese) treasuries. I see the JPY is starting to weaken, but 30 yr JGB are still at 1.96%.

Inversely, smaller consumption of imported goods as well as increased internal savings rates within the US (in addition to debt monetization) will easily sustain US long term debt at low yields.

We have a lot of room here. And better yet, the debt destruction occuring here is as deflationary as it gets.

I think in this situation it is wise to straddle the fence … Own some precious metals all while being careful.

If we’ve had the net credit multiplier fall from 10x to 5x overnight on an original money base of 700B, we’ve lost 3.5T in the system. Doubling the money base won’t solve the problem. You need to first fill that 3.5T hole.

None of us know the real multiplier before and after, but this is my point…

As we can all see, there is mucho resistance to tarp 3.5T to the banking system… Some amount in that realm is needed before we can just get back to “business as usual,” forget inflation.

Regardless, we can see precious metals form a ‘mini bubble’ even in this environment, because there are so few ounces out there relative to the amount of aggregate money… $1000 silver and $5000 gold doesn’t affect most of the real world, unlike $200 crude (since precious metals are not a primary operating input into global economies).

buffet’s halo is based on his track record built back when he had a much smaller asset-base – we are fools to attribute those small-cap performances with what he has to do now

he is a fool to try to pull that over on us

in any case, since everyone is a result of their habits, i suspect his investment discipline/habit suite is ill-formed for this current set of markets – in that sense, the older the manager, the more set in their ways, the less likey they are to be able to pivot/deke/jive/improvise if that is what is needed – diff things in diff markets – if things had persisted in the 1995 mode for the following 40yrs, then buffet would be a solid choice, but that is not the case

not that he’s gonna need any tag days, regardless – he’d be WAY more honest if he relinquished his position and exited the scene

I don’t think Japan is a good example, since they are net creditors and the US is a net debtor. When you are a creditor, deflation works in your favor (and there is little incentive for the political elite to fight it). When you are a net debtor like the US, inflation works for you and deflation works against you — the political elite in the US cannot allow it to last for very long.

As for a central bank causing inflation? Please. Its so easy even a member of Congress can do it. Ask any banana republic dictator.

If the US really wants to avoid deflation (and any net debtor does) — it can easily do it.

If you want to argue deflation in the short term (1-2 years), I respectfully disagree but we all have our opinions.

If you want to argue deflation over a longer period? Sorry, you are dead wrong. Worst case, we can appoint a third world dictator as Fed Chair and it will be all over in a few months.

It is in the interest of the political elite in the US to fool the unwashed masses to *think* there is deflation — but even Bernanke knows that deflation is trivially easy to combat. Inflation can be hard to route out of an economy — but deflation is never an issue unless the central bank wants it to be

BTW — even though I think the deflation story is nonsense, Treasury yields might stay low (negative real yields) because of investor fear. Investors were **WAY** to complacent about risk 1997-2007 (ish), and they have been way too paranoid about risk ever since. That paranoia could stay for a while longer

Another reason for low rates: Many professional investors are scared silly about career risk (since they are playing with other people’s money). Getting a negative return on someone else’s money is OK, since you can always cite CPI in defense of your career. Everyone else is doing it too. In the current environment, it is much safer for professional investors to be wrong **with the group** than to go solo and try to eek out a positive real return.

Eventually, it will snap — as anyone who invests in Treasuries is getting a negative real return. Yes, I have seen the latest CPI print but that has very little to do with reality. The actual cost of living was and still is climbing 6-7% per annum.

Sooner or later, the baby boom generation will have to get a positive real return or else work until they are dead. The boomers have been promised a few decades of golf and complaining about the government from Florida during the 5:00p dinner buffet — they won’t be able to do that on Treasuries

The contrarian view to take is that deflation will continue. Its a lot harder to come by someone with a pro-treasury view than a recovery view.

That said, I agree in the long term they will fix it… In the intermediate term though, they have been too slow to print money and do what third world dictators do. The credit economy is in a multitrillion dollar deficit, and badly needs refunding. Until they pull that off, the deflation “sham” will continue to justify the funding of US treasuries purchases. After that, I’m all with you. I’d rather buy nontreasury assets in my investment accounts and let this run its course… but I think the treasuries have a long way to run up.

Its a lot harder to come by someone with a pro-treasury view than a recovery view.

While its true that finding someone to have chat with about USTs won’t often turn up a bullish view, the current positioning of global sovereign bond markets is unmistakably bullish. I would also add that global fund managers, especially the big pension fund managers, whenever they are interviewed allow they are hiding in sovereign debt.

But what’s also clear now is that the market is choking on supply.

My January essay lays out why sovereign debt is headed towards a bear market whether we inflate, or deflate. And, in addition, lays out why Japan is a superficial analog to current conditions in the US, and will fail as a guidepost for what’s coming here.

gregor: your website is currently unavailable. I’d like to read the essay. Regardless, I checked out your paths to repudiation article, and it reminds me of my short-treasury argument I made a few months back (which I’ve since abandoned). I believe changed trade and consumption flows need to be better considered.

Here is two essays that counterpoint each other and demonstrate my changed view. Look forward to comments.

Michael Krause — your unsustainable bubble post is older than your buy Trsy post… and I would say it is far more convincing.

As you point out and argue quite convincingly, the United States simply cannot service the debt levels we already have planned. It isn’t a question of political will or what the voters want. 2+2 does not equal 10 even if 100% of registered voters say so.

The United States will pay. Its either going to be MUCH higher interest rates, a MUCH lower US dollar — or some combination thereof. Expectations of a lower dollar often cause non-US investors to demand higher interest rates to compensate, so this argument gets very circular.

It is possible that, in the initial stages, more of the decline of the US is in the dollar (and not rates), but that doesn’t really help investors. And a declining dollar is basically the same thing as inflation — each dollar buys less.

Assuming the end of the world (for the US) is near, our economy cannot generate enough tax revenue to pay our debts — and Uncle Sam is forced to print the money. Assuming people like Buffet, Julian Roberts, Jim Rogers, and a host of others are correct — inflation is already an issue.

Maybe there is a trading opportunity in buying UST, but it is not value based. And it requires you to find a bigger sucker to sell to at “the top”. A few people will get lucky, but the majority of people cannot all sell at the top. Most people are going to loose